Key Takeaways:
- In Zero-Based Budgeting (ZBB), you start your budget from zero, then only add in what is truly needed.
- ZBB is not only useful in a business environment, but also for individuals and households.
- ZBB is a great way to determine whether your spending is aligned with your goals, priorities, and values.
Twitter has been in the news lately: you may have heard that Elon Musk recently acquired the company for $44 billion. This past Friday, Twitter laid off over 3,000 employees, nearly half of its staff. Then, over the weekend, it asked dozens of those employees to come back to work. This series of events is a decent analog for the concept of Zero-Based Budgeting (ZBB).
In ZBB, the idea is to start a budget from zero, then every function of a business is evaluated for what is needed in the upcoming period (month, quarter, year(s), etc.) and its costs. From that evaluation and analysis, the overall budget is built. Essentially, cut it to zero, then only add back what is truly needed. From an outsider’s perspective, this may be taking place at Twitter HQ.
The benefits of Zero-Based Budgeting are that it forces the business to justify every expense, thus reducing waste. Done properly, this method will create financial efficiency within the company.
However, in a real-world business environment, it is not without cons. Aside from being a time-consuming process, layoffs and budget cuts are not always great for morale, managers may have an incentive to artificially bloat their budget, and there is a possibility of missing intangibles in the budget analysis.
While useful in a business setting, ZBB is also effective for individuals and households. Every so often, it is a worthwhile exercise to review all your monthly expenses and ask whether each one is reasonable and necessary, or have your desires and priorities changed? Think about all the different services on autopay – you may have items in your budget that you pay for every month but have not used in years. Can you cut one or more of those items and redirect the funds towards something more meaningful to you, like charitable giving or a family vacation?
Going through this exercise is a great way to determine whether your spending and your budget are aligned with your goals, priorities, and values. Doing a full ZBB analysis on your personal budget can take more time than most individuals have to spare. However, periodically, perhaps as you experience major life changes (i.e., marriage, new child, moving to a new location, starting a new job, etc.) consider undertaking this values-driven approach, even if only piece by piece, to recalibrate your cash flow.
Sources:
Kagan, Julia, Thomas Brock, and Pete Rathburn; Zero-Based Budgeting: What It Is and How to Use It; Investopedia; March 14, 2022; https://www.investopedia.com/terms/z/zbb.asp
Reuters; Twitter asks some laid off workers to come back, Bloomberg reports; Nov. 6, 2022; https://www.reuters.com/technology/twitter-asks-some-laid-off-workers-come-back-bloomberg-news-2022-11-06/
